Corporate treasurers today find themselves in uncharted
and turbulent waters. They’re navigating internal pressures and external forces
that are creating deep structural change in the banking industry – and that
call for renewed strategies for running efficient global treasury operations.
Today, many treasurers are once again embracing the Earnings Credit Rate (ECR)
as a practical and versatile way to strengthen corporate income statements and
manage liquidity. This value will only increase as banks broaden the range of
Earnings Credit (EC)-eligible service fees and apply the concept globally
across entities, geographies and currencies.
The Earnings Credit is a calculation of the return
that banking customers earn on funds held overnight in a demand deposit or
current account at the specified Earnings Credit Rate. Rather than receiving
hard interest, depositors receive this return in the form of an ‘earnings
credit allowance’, which is then automatically applied against bank service
Internal and External Forces Create New
Treasurers now operate with higher corporate
profiles, greater responsibility and more intense scrutiny than ever before.
And they face a fast-changing environment that demands agile thinking about a
host of complex internal and external variables.
inside view: cost pressures require new strategies. Faced with
tepid global growth, economic uncertainty and persistently low interest rates,
treasurers continue to operate under corporate mandates to do more with less.
But new performance metrics tied to expense reduction can be especially tough
to meet as bank service fees, for example, continue to rise. What’s more,
global expansion is challenging already overburdened treasury staff to
carefully and economically manage cash positions and investments across
currencies, time zones, jurisdictions and multiple bank platforms.
Treasurers must also adhere to internal investment guidelines emphasising
increased liquidity and preservation of principal. In a low interest rate
environment, the risks of tying up cash often outweigh the rewards. As a
result, directors are paying closer attention than ever to how much global cash
treasurers are holding, what specific instruments they’re investing in and
which financial institutions are holding these instruments. Increasingly, cash
balances are becoming more challenging to manage as eligible options for cash
placement decrease. Investment policies have become increasingly conservative,
eliminating many of the investment options used prior to the crisis, and
placing stricter balance limits on the remaining options.
factors, treasurers are exploring strategies to offset costs, efficient ways to
monitor and manage liquid assets, and safe investment solutions that minimise
bank and sovereign risks – all while ensuring liquidity.
External factors drive alternative cash
strategies. These internal challenges are intensified by complex
external factors that are challenging the status quo – and further dictating
how treasurers operate. New and emerging regulations are bringing unprecedented
structural change to the financial services industry, and treasurers are
responding to a new norm characterised by higher service fees, tighter credit
and fewer investment options.
Treasurers are navigating several US
regulatory changes that are driving increased liquidity and altering the
investment landscape. When the Federal Deposit Insurance Corporation’s (FDIC)
Transaction Account Guarantee Program (TAGP) expired in 2012, and Regulation Q
was repealed in 2011, significant levels of cash could have flowed out of bank
deposits. But instead, according to the FDIC Quarterly Banking Profile – as of
Q213, non-interest bearing (NIB) deposits are still almost 70% of all bank
deposits in excess of the FDIC standard maximum coverage limit of US$250,000
per depositor. This reflects treasurers’ continued interest in concentrating
assets in demand deposit accounts (DDAs) and the value that treasurers and
their boards place on bank deposits.
Treasurers are also preparing for
new bank regulations that will reshape and revalue traditional short-term cash
positions. The new Basel III global capital adequacy regulations, which are
being phased in through 2019, places a significant premium on bank funding
through DDA balances linked to operating activity. The Security and Exchange
Commission’s (SEC) proposed additional reforms of institutional Money Market
Funds (MMFs) also threaten to affect a traditional vehicle for short-term
Together, these variables are causing treasurers to
rethink approaches to generate shareholder value. As the regulatory landscape
shifts, many treasurers are re-evaluating their global banking relationships
and are using ECs derived from overnight DDA balances to unlock the intrinsic
value of these relationships.
Earnings Credits: A Versatile
As treasurers cope with internal and external forces
and reexamine their cash management strategies, many are turning to ECs as a
practical way to address multiple objectives and challenges. ECs provide a
stable and reliable way to reduce treasury expenses, maximise corporate profits
and manage daily liquidity.
The value of earnings credits:
For telecoms giant Sprint, using ECs to offset
the cost of bank services has been a “win-win,” according to Jennifer Dale,
assistant treasurer, and offers the company a range of benefits. “If you start
with assessing returns, right now ECs are giving us better value for our
balances,” says Dale. Cost reduction also plays a key role in the company’s use
of ECs and is evident in Sprint’s ongoing initiative to apply working capital
best practices. That effort has freed up approximately US$1bn since its
inception, and the use of ECs has been an important part of the initiative.
Dale refers to ECs as “the gift that keeps on giving,” because they provide the
company with ongoing budgetary relief, not just one-time expense reductions.
Sprint is now also using ECs to offset credit card acquirer fees. J.P.
Morgan recently introduced an EC programme for users of Chase Paymentech, TM a
processor of merchant services. “We can now use earnings credits to reduce our
credit card service fees and interchange costs – an expense control tool that
was simply not available before,” says Dale.
Benefit: Maximising Shareholder Value. ECs can also create
significant value beyond the treasury budget. Treasurers are using ECR to
improve key financial ratios. Specifically, ECR can enhance operating margin
and potentially increase shareholder value, particularly as compared to
traditional interest yielding investments. Here’s how. Using ECs to lower cash
payment for bank service fees can reduce reported sales general and
administrative (SG&A) expenses directly. Reducing SG&A in turn improves
operating income, or earnings before interest and taxes (EBIT), and also
impacts key financial ratios such as operating margin. For companies heavily
leveraged or evaluated based on debt levels, using ECR to improve ratios such
as earnings before interest, taxes, depreciation and amortisation (EBITDA) to
interest and net debt to EBITDA can provide benefits as well.
As banks expand the types of fees that companies can offset with ECs,
treasurers will have even greater opportunity to strengthen the income
statement. For example, many companies book credit card acceptance fees,
including interchange, under cost of goods sold (COGS) because these fees tie
directly to revenue. By using ECs to offset these fees and thereby reduce COGS,
companies may not only be able to improve operating margin; they could boost
reported gross profit as well. We suggest that clients consult with an
accounting or financial advisor about the potential financial impact of
Maintaining full liquidity. ECs are also
ideally suited to help treasurers maintain and manage daily liquidity, so cash
is readily available for multiple purposes. In today’s credit-constrained
environment, this frequently includes self-funding working capital and capex
for operations – a strategy that can mitigate credit risks and lower the cost
of capital. DDA balances are fully liquid deposits that are accessible at a
moment’s notice; are not subject to delays, cut-off times or market closures;
and carry no extra fees or withdrawal restrictions. Liquidity is critical to
companies with cash forecasting challenges that might have otherwise had to
break term deposits and incur fees or wind down investments to meet unexpected
working capital needs. Treasury staff can also take advantage of global bank
portals, integrated with bank cash management platforms, to easily monitor and
control global balances.
ECR: A New Lever for Banking
The market factors driving wider adoption of ECR
are ushering in a new paradigm for relationships between treasurers and their
Regulations can motivate banks to rebalance the services they
provide, rethink the service fees they charge and take a more holistic view of
client relationships. As part of this strategy, banks recognise the intrinsic
value of ECR balances toward client return on investment (ROI), and are
investing in new technologies and approaches that encourage client operating
deposits. Look for banks to analyse the flow of corporate transactions and peg
ECRs to the value of these cash balances. Banks are also creating new services
that take advantage of global relationships, including programmes that make ECR
a truly global solution for international cash balances – including balances
held offshore for strategic purposes.
For treasurers, there’s a powerful
opportunity at hand to re-think and re-evaluate global banking relationships to
determine which ones deliver the greatest intrinsic value. As they focus on the
large pools of liquid assets used to support global operations, treasurers can
potentially offset more banking fees by negotiating ECRs based on DDA balances
aggregated across entities, geographies and currencies as well as on the value
of the broader banking relationship. Recent research has revealed a trend that
is especially relevant to treasurers focused on cost control: companies that
use earnings credits most aggressively also benefit from lower pricing on their
This combination of internal and external factors is
creating a renewed focus on earnings credits by treasurers and increased
motivation for banks, and bodes well for a versatile solution that marries cost
control with liquidity management.
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